Sales of large industrial properties more than doubled last year, smashing the record for annual volume, as Eastdil Secured grabbed the brokerage crown and ended a decade-long reign by rival CBRE.
An astonishing $103.3 billion of warehouses worth at least $25 million changed hands in 2021, according to Real Estate Alert’s Deal Database, up 142% over the previous year. The explosion of activity put annual volume in the sector — considered an unglamorous niche asset class just a decade ago — within striking distance of the $105.7 billion of office sales. The fourth quarter alone saw $51.3 billion of trades, exceeding the prior annual record of $42.7 billion achieved in 2019 and again in 2020.
Eastdil dominated a surge in blockbuster portfolio trades to increase its volume about sixfold and claim the title for the first time since 2010. It brokered $30 billion of sales for a 31.4% market share, up from 11.6% a year ago. Defending champ CBRE finished second with $27.9 billion of sales and a 29.2% market share, down from 37.4%. The rest of the top-five firms saw their market shares shrink or remain static but made big gains in sales activity.
“The volume of activity was voracious and reflective of the underlying fundamentals,” said Roger Morales, head of real estate acquisitions in the Americas at KKR. “It’s unquestionable that the tailwinds are strong. The expectation is that occupancies remain very high, and therefore rent growth will continue to be outsized.”
The year started off with a record first quarter, and each successive quarter built on the momentum as Covid-19 vaccines were rolled out, the economy picked up steam and industrial occupancies and rents reached historic levels. Market pros said 2022 is getting off to a furious start, and they expect another banner year.
“The pace of play is even faster this month than it was in November and December,” said John Huguenard, co-head of JLL’s national industrial team. “We are probably in for a good run in industrial in all of 2022 and 2023. Past that, I don’t think anybody knows.”
While most players remain bullish, the exuberance has a few investors concerned about potential overheating. “Even substandard real estate, buildings with troubled histories, are setting records,” said Jeff Small, chief executive of MDH Partners of Atlanta. “I get concerned with seeing the number of new players in the space buying indiscriminately. At some point, the music stops, and you’ve got that empty chair.”
The sector has been riding a wave of growth in e-commerce that’s driving tenant demand for warehouses, and the pandemic accelerated that trend. Global supply-chain disruptions also have been a new boon for the sector, as businesses are stockpiling inventory to avoid being caught empty-handed. Prologis, which holds the nation’s largest industrial portfolio, estimates its tenants “will carry an additional 5% to 10% of inventory compared to pre-pandemic levels going forward,” Green Street, the parent of Real Estate Alert, said in a Jan. 24 report.
Ward Fitzgerald, chief executive of EQT Exeter, another major industrial owner, said that as a result, “demand is as robust as ever.”
“There are structural issues in the supply chain and in the movement of goods that are going to necessitate more [warehouse] demand than there is supply for a good number of years,” Fitzgerald said. “Organizations have to increase inventories or bring goods in sooner than they may have.”
Meanwhile, e-commerce continues to bolster the leasing market. It requires three times the amount of warehouse space relative to physical retail businesses, according to Green Street. The research firm forecasts that e-commerce will account for 30% of U.S. retail sales in 2030, up from 14% last year.
With that backdrop, leasing activity was extremely strong last year. Leases on a record 1 billion sf of industrial space were signed in 2021, pushing occupancy up to a record 96.8% at yearend, according to CBRE. The average asking rent climbed 11% to a record $9.10/sf. The firm projects double-digit rent growth again this year.
That is driving up valuations, as the potential for increased income makes stingy cap rates more palatable. Thirty-four markets had trades at cap rates under 4% last year, while yields dipped below 3% in seven markets, according to JLL. Meanwhile, the average per-sf price for trades worth at least $25 million was a record $135/sf last year, a 29% increase over 2020, according to the Deal Database.
Investor demand for industrial properties is wide and deep. Chris Riley, a CBRE president who leads the firm’s U.S. industrial and logistics capital-markets team, said that five years ago, institutional players targeted about 30 markets. Now that figure has more than doubled, with “many more secondary markets in vogue.”
“Whether it is a last-mile delivery station, a light-industrial facility, a mid-size distribution center, or a larger bulk warehouse, there are investors targeting all property types, all geographies and all types of risk profiles,” Riley said. “And whether it is core, core-plus, value-add or opportunistic, there is really no hole in the capital stack.”
With many new entrants hungry to establish a footprint, and existing players seeking to scale up or rebuild after their own sales, there were a record 11 trades worth at least $1 billion. That topped the previous annual record of four such deals in 2019. Meanwhile, five of those deals exceeded $2 billion last year. In the previous two decades, only four deals had crossed that threshold.
The largest trade was a record $6.7 billion, more than double the prior high-water mark. In that deal, a group of investors led by GIC, Singapore’s sovereign wealth fund, acquired a 99% stake in a 70.5 million-sf portfolio from EQT Exeter. Market pros say they expect more blockbuster acquisitions in the year ahead by big investors who don’t have time to play small ball in a rapidly moving sector.
“On any billion-dollar-plus portfolio, you are going to get a dozen bids, and they will be largely, but not all, international,” said Fitzgerald, of EQT Exeter. “Large institutions in Canada, the Middle East, Asia and European insurance companies cannot access industrial in a significant way from so far away, and they don’t want to write a check for $25 million 50 times.”
Market pros said soaring tenant demand is helping owners quickly fill vacancies and raise below-market rents upon rollover. That is boosting net operating incomes and fueling rapid property appreciation. As a result, owners who may have planned three- to five-year holds are instead shopping properties they just bought a year or two ago.
“Holds shortened in large part because assets outperformed,” said Morales, of KKR, which sold a $2.2 billion portfolio at an initial annual yield just under 4%. “Appreciation has pulled forward business plans, and that resulted in sales. I think it happens again in 2022.”
While a heavy year of trading can suppress listings the following year in sectors with limited supply, the industrial well is deep. There is 20 billion sf of industrial space in the U.S., compared with 4 billion sf of office space, according to Green Street.
And more space is on the way. Construction is at an all-time high but still struggling to keep up with tenant demand. There was a record 513.9 million sf being built at yearend, 200 million sf more than at the end of 2020, according to CBRE. But deliveries were down 10.3% because supply-chain issues made materials scarce and complicated construction timelines, serving as a check on oversupply.
As in other sectors, market pros cite rising interest rates, inflation, continued challenges with the pandemic and geopolitical tensions as potential headwinds, but largely see room for growth ahead this year.
Small, of MDH, said that while 2022 should be a good year, the strong run will not last forever. Fundamentals support the strong activity and pricing in the industrial sector for now, but cap rates can’t compress forever and eventually may send many investors back toward other sectors in terms of higher yields, he said.
“At some point, people will want to invest in office and retail again, in a significant way, not just at the margins,” Small said. “It doesn’t take a big shift in investor sentiment. Just as fast as capital came into our space, it can be reallocated elsewhere, especially with such low cap rates.”
In the brokerage race, every major firm saw huge gains in sales volume. Eastdil leapfrogged from fourth place in 2020 to the top spot by having a hand in eight of the nine largest trades, scoring the highest industrial volume of any brokerage in history. CBRE nearly doubled its prior-year volume.
JLL dropped from second place to third place, despite increasing its sales volume to $14.3 billion from $7.8 billion. It earned a 15.0% share of brokered trades, down from 19.6%. Cushman & Wakefield also roughly doubled its volume to $12.6 billion, but its market share dropped to 13.1% from 15.6% as it fell to fourth place from third.
Colliers increased its sales 137% to $4.7 billion, climbing one rung into fifth place. It repeated its 4.9% market share. Newmark, which finished fifth in 2020, fell to sixth place, despite increasing its volume 57% to $3.7 billion for a 3.9% market share.
Broker rankings are based on property transactions that closed in 2021 and involved full or partial stakes valued at $25 million or more. When multiple brokers shared a listing, the dollar credit was divided evenly, but each broker was credited with one transaction. Only brokers for sellers were given credit. Portfolio transactions were included if the package price was at least $25 million.